In 2009, warnings regarding leveraged inverse Exchange Traded Funds ("ETFs") exploded. Both the Financial Industry Regulatory Authority ("FINRA") and the Securities Exchange Commission ("SEC") issued alerts against the use of these "potentially dangerous" investment vehicles. In July 2009, both UBS and Edward Jones & Co. ended the sale of leveraged inverse ETFs, which are intended only for the most sophisticated daily investors, not for long-term holders.
Despite this concerted effort, conservative investors still find that leveraged inverse ETFs have devastated their investment portfolios. In fact, in December 2010, the investment fraud lawyers at Block & Landsman filed a new arbitration claim on behalf of two investors who lost significant amounts of money from leveraged inverse ETFs that were held in their accounts for more than one year. As a result, a new focus on these destructive investments is necessary.
Exchange Traded Funds ("ETFs") are registered investment companies which contain a portfolio of securities that track a particular index (like the S&P 500) or an underlying benchmark. Leveraged ETFs are designed to deliver multiples of the performance of the index they track. Inverse ETFs (also known as "short" funds) are designed to deliver the opposite of the performance of the index they track. Leveraged inverse ETFs (often called "ultra short" funds) are intended to return a multiple of the inverse performance of the underlying index. As an example, with a 2x (two times) leveraged inverse ETF that tracks the S&P 500, if the index increases 2% in a day, the ETF will decrease in value by 4%.
One of the greatest risks to investors is that most leveraged inverse ETFs "reset" daily, meaning that they are designed to achieve their stated objectives on a daily basis. As a result, they are not intended for long-term hold investors because the performance of these ETFs over longer periods of times (weeks or months) can differ significantly from the index they track over the same time period. The effect is potentially devastating to a conservative investor because, as a result of the compounding factor created by the daily reset, the leveraged inverse ETF can experience substantial losses over time even if the underlying index experiences an overall gain. One example given by the SEC involves an index that opens at 100 and closes at 110, and the next day closes at 100. A 2x leveraged inverse ETF will decrease the first day by 20% and will increase the second day by 18%. Thus, over 2 days the index will be flat but the 2x leveraged inverse ETF would have lost nearly 2% of its value. The effects of this type of mathematical compounding can grow significantly over time, resulting in large losses for the 2x leveraged inverse ETF investor. According to the SEC, in a four month period of time, a particular index gained 2%, but the 2x leveraged inverse ETF tracking that index fell by 25%.
If you have lost money through leveraged inverse ETFs, or any other unsuitable investment, the investment fraud lawyers at Block & Landsman can help.
